Overreaction in the Australian equity market: 1974–1997

Abstract

Previous assessment of overreaction in the Australian equity market by Brailsford [Brailsford, T., 1992. A test for the winner–loser anomaly in the Australian equity market: 1958–87, Journal of Business Finance and Accounting, 19 (2) 225–241] and Allen and Prince [Allen, D.E., Prince, R., 1995. The winner/loser hypothesis: Some preliminary Australian evidence on the impact of changing risk. Applied Economics Letters 2, 280–283] finds no evidence of performance reversal in loser portfolios and no significant difference between the test period performance of winner and loser portfolios. This result is not consistent with evidence from overseas markets and warrants further examination. This study finds evidence of price reversal where monthly portfolio rebalancing is employed but the price reversal disappears when a buy and hold strategy is used. Further analysis reveals that the loser portfolio is dominated by small firms and that any abnormal returns are not exploitable given the lack of liquidity in small capitalisation Australian stocks. It is possible that the lack of consistency between Australian and US research can be explained by the different time periods examined in these studies.